New Zealand's old-age pension scheme and household saving

Contents:

Purpose – The combination of low rates of private saving and projected increases in the fiscal burden of financing a public pension scheme for an ageing population poses a major policy challenge in New Zealand. Policy discourses espouse pension reform and the redoubling of household saving efforts. However, some of the policy options could have offsetting effects. To inform the debate with research findings, the purpose of this paper is to revisit the relationship between social security and household saving. Design/methodology/approach – The paper employs a constructed social security wealth (SSW) variable in a hybrid life cycle-permanent income consumption/saving model pioneered by Feldstein. Time series techniques are used. Findings – The results show that an increase in the constructed gross SSW variable boosts saving. This suggests that concerns with accumulating assets to match the length of the implicit life expectancy at the current pension eligibility age overwhelm the view that the pension benefit is an adequate substitute for household assets. The other findings are consistent with a priori expectations: increases in disposable income boost saving; there is a significant propensity to consume out of household net wealth; and inflation and unemployment engender significant precautionary saving. Practical implications – A policy to raise the retirement age may reduce the gross SSW and therefore the fiscal burden of the public pension scheme. However, in shortening the expected post-retirement period that households have to save for, the policy may also reduce the saving rate. Originality/value – Although the Feldstein approach has been used in studies in countries like Australia, Canada and the USA, a comparable study has not been undertaken in New Zealand. This study seeks to fill that void.

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